Restraint of Trade: How far is too far?

Employers commonly use restraint of trade clauses in employment contracts to prevent their employees from jumping ship and working for a competitor when their employment ends. In doing so, employers are seeking to protect their business as well as their confidential information, trade secrets and customer, staff and supplier connections. Seems reasonable doesn’t it?

While confidentiality and non-solicitation clauses are generally found to be reasonable and enforceable,the challenge for employers is to ensure their restraint of trade clauses are not struck out for going beyond what is necessary to protect their legitimate business interests.

In a recent case before the Victorian Supreme Court[1], Just Group Ltd (JGL), a retailer company which includes Just Jeans, Peter Alexander and Portman’s, alleged their CFO, who was employed with them for just 6 months, breached her restraint of trade and confidentiality clauses when she accepted a job offer from rival Cotton On. Justice McDonald concluded that the restraints were too broad and went beyond what was reasonable to protect the company’s legitimate business interests. Consequently the restraints were unenforceable.

The restraint clauses listed ‘restricted activities’ that prohibited the employee from certain conduct during and after her employment, and from engaging in “any activity” which was the same as or similar to that of her current employer. Furthermore, she was prohibited from working for up to 50 other entities and brands (including Cotton on), and restrained from commencing employment in Australia and New Zealand for a maximum period of up to 24 months.

JGL argued that the employee had been exposed to a considerable volume of confidential information during her employment and, given the fierce competition between JGL and Cotton On, the potential for the employee to cause damage to JGL’s commercial interest was high. However, the court found that the restraints were unreasonable because they prevented her from being employed in a position where confidential information acquired by her during her employment with JGL would be irrelevant to a new employer.

Despite the outcome in this case, not all restraint of trade clauses will be invalid and holding an employee to their contractual promise is possible. However, an employer cannot stop a former employee from earning a living and working elsewhere. For restraint clauses to be enforceable, an employer must establish the restraints are reasonably necessary to protect the employer’s legitimate business interests.

In assessing what is ‘reasonable’, the courts will consider a number of factors including:

  • The seniority and special skills/knowledge of the employee
  • The time period of the clause after employment ends
  • The geographical area that the clause applies to
  • The specific activities or information that is restrained

In most Australian states the court does not have the ability to reduce the restraint period or area provided in the employment contract, with the result that there is often no enforceable restraint where the contract terms are found to be unreasonable. In order to overcome this, employers can use ‘Cascading Clauses’ in the employment contract to enable the restraint period or area to be read down in the event that a court considers them excessive or unreasonable. Each one is expressed as being separate, independent and severable, so if one combination is considered harsh, another combination might be enforceable.

Lessons for Employers

  • Take care when drafting Restraint of Trade  clauses to ensure they are reasonable in your particular circumstances. Use cascading clauses if possible.
  • Consider whether your Restraint of Trade clauses go beyond what is necessary to protect your goodwill and legitimate business interests
  • Avoid implementing a one size fits all approach. Instead, tailor restraint clauses to apply to the particular situation. This is because each employee differs in their experience, seniority, remuneration, client/customer access etc.
  • When a person’s employment is ending, remind them of their post- employment contractual obligations, e.g. duty of confidentiality, non-solicitation and non-compete restraints.

[1] Just Group Ltd v Peck [2016] VSC 614 (17 October 2016)

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